Los Angeles Cannabis Audit: Problems, Problems, Problems

On December 1, 2022, the Los Angeles Controller released a report (PDF here) with a pretty lame pun as a name: “High Maintenance: Review of the City’s Cannabis Regulation Efforts.” While the report’s name is bland, it reveals the pretty dire state of Los Angeles’s cannabis regulation and licensing. Since opening up for licensing, LA has been mired in controversies. Even for those of us who have practiced here for a long time, the report can be shocking at times. Indeed, one of the main conclusions of the report is that:

Overall, we found that the City should do more to close down unlicensed cannabis businesses, refine tools to deter additional unlicensed businesses from entering the market, monitor licensed cannabis businesses for regulatory compliance, mitigate the risk of tax evasion by cannabis businesses, and proactively determine how cannabis business tax revenue should be spent.

To say this is an understatement is itself and understatement. The report is long and I encourage anyone focused on LA cannabis to give it a hard read; or at least to read the executive summary in the first link at the top of this post. That said, I’ll highlight some of what I think are the most key points in the report.

LA has collected a LOT of tax money

Between January 2018 and December 2021, the Los Angeles Office of Finance (which collects taxes from the cannabis program) has collected a whopping $320 million in taxes, with at least $31 million more outstanding. This makes LA the largest local cannabis tax collector, possibly in the world. While we certainly won’t argue with the fact that LA cannabis operators are over-taxed, it bears noting that the actual amount of uncollected taxes may remain much higher. The report notes that the City hasn’t implemented sufficient audit structures and, given a three-year statute of limitations, may be leaving money on the table.

Either way, with all that tax money, one would imagine that the city would be doing a lot to prop up its approximately 700 licensed businesses and to shut down unlicensed and illegal operators. Well….. it turns out that’s not really happening either.

LA is doing little to nothing about the illicit market

The initial findings of the report note:

the Los Angeles Police Department (LAPD) reports that the number of known unlicensed cannabis businesses has decreased from 300 in 2018 to approximately 100 in June 2022. Though this reduction has been touted as a measure of progress, the actual number of unlicensed cannabis businesses is likely higher.

To anyone with any knowledge of LA cannabis, the idea that unlicensed businesses have decreased since 2018 is almost laughable. One of the biggest complaints our LA cannabis team hears is how difficult it is for licensed, compliant businesses to compete with the illegal market.

The extent to which the illegal market has grown, however, remains a mystery. But it is a problem, and a big one at that. Nevertheless, for all the problems the illegal market brings, the report recognizes in numerous places that the city is not doing nearly enough to stop it.

To illustrate, here’s a pretty shocking statistic: between January 2018 and June 2022, LA received more than 7,300 complaints via an online portal. During that time, a staggering 5,056 of those complaints remain completely unprocessed. Here’s what the report says:

However, more than 5,000 complaints remain unprocessed with no indication of their work status. We reviewed a limited number of unprocessed complaints and found that many could generally be categorized as follows:

• personal cannabis use, which DCR does not regulate;

• alleged unlicensed commercial cannabis activity, which would be referred to LAPD;

• quality-of-life issues in connection with a licensed cannabis business, such as customer behavior in the public, which DCR believes is outside their regulatory purview; and

• complaints against licensed cannabis businesses that DCR should investigate.

While we could not review and categorize all 5,000 unprocessed complaints, we found troubling allegations against licensed cannabis businesses, such as sales to minors and onsite cannabis consumption by employees—which are exactly the types of business behaviors and practices that DCR was established to regulate.

This ties in well to the next point.

Los Angeles licensed businesses are not adequately monitored

Not only has the city failed to respond to complaints about unlicensed cannabis activity, but it’s also not monitoring licensed cannabis businesses. In preparing the report, the Controller stopped in at six different licensed dispensaries in LA. It found regulatory violations in all of them. Here’s just a blip of what the Controller saw:

[W]e observed several regulatory violations at every dispensary we visited, including some categorized by DCR as moderate and major violations.

While most violations we observed were minor, these requirements still serve to create a well-regulated business environment. For example, five of six dispensaries we visited did not display their neighborhood liaison’s contact information. . . .

The lack of proper exit packaging at some dispensaries was also problematic. The State requires exit packaging to be: (1) child-resistant to make it difficult for children under five years of age to open; and (2) tamper-evident to indicate to the customer if the package has been opened. Three of the six dispensaries sold cannabis products without proper exit packaging and used simple paper bags instead.

Two dispensaries also had cannabis products in containers that were easily accessible to customers without the assistance of the licensee’s personnel. For example, [in one case] containers . . . were openly displayed at the counter of a dispensary we visited, allowing any customer to walk up and inspect the quality of the cannabis. If the dispensary we visited was busier, it could have been difficult to prevent customers from taking the containers home without paying for the product.

Another dispensary we visited was in the process of upgrading its walk-up window. Sales through exterior openings, such as drive-throughs or walk-up windows, are strictly prohibited under DCR’s regulations. Major violations like this can be subject to administrative fines worth up to $42,026 (three times the current license fee).

LA has way too many cooks in the kitchen

The problem is exacerbated by the fact that there are just too many cooks in the kitchen: an astonishing seven different local agencies have varying degrees of control over enforcement. In 2019, a “Cannabis Enforcement Taskforce” was formed to coordinate among the seven agencies, but it’s not done nearly enough (as seen by the fact that more than 5,000 complaints remain unresolved). Perhaps this has something to do with the fact that cannabis taxes are simply deposited into the city’s general fund and not earmarked for any specific purpose. Clearly, the agencies need to coordinate better. It would probably help if the tax money could be allocated better.

LA’s taxes need changing

If you’ve gotten this far, you might think that the report has only bad news. However, the Controller recommends lowering taxes, in part to give licensed businesses a fighting chance against illegal businesses that don’t pay any taxes.

There’s a lot of ground to cover with respect to the LA Controller’s report. Unfortunately we can only scratch the surface in this post. As mentioned, anyone interested in LA cannabis should give the report a thorough read. Stay tuned to the Canna Law Blog for more updates on Los Angeles cannabis.

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